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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, July 16, 2020

1. Tight trading ranges ahead of Netflix earnings

2. Historical look at the market's best bellwether

3. Is Apple flashing a warning signal?

Market Moves

Stocks, bonds and commodities all maintained a tight trading range today ahead of the earnings report from Netflix (NFLX). When the company reported earnings after hours, its share price dropped by 15 percent in the first five minutes. That after-hours move will have an impact on the markets tomorrow morning. Futures on the Nasdaq 100 index (NDX) fell one percent on the news, while futures for the S&P 500 index (SPX) fell only one half percent lower.

The chart below shows how a pattern of increasing volatility has been apparent on the price action for NFLX shares. Falling prices often exhibit rising volatility, but when stocks show new volatility even as they hit new highs, it tends to be a warning that prices could reverse their trend. That happens because the increased volatility reflects high expectations on the part of investors. If those expectations are not met (Netflix missed its estimates), then the stock price falls. If this fall leads to a continuing downward trend starting tomorrow, it could have a significantly negative influence on the rest of the market.

Historical Look at the Market's Best Bellwether
One stock has had much more influence on market indexes than all others. For years shares of Apple (AAPL) have been included in a larger number of indexes and ETFs than any other single issue. It is useful to look at what has taken place in the past five years as AAPL has exhibited fluctuations in its notably upward trend.

The chart below features a weekly time frame of AAPL share prices. It also shows a linear regression (LR) study depicting the statistically average price since 2016. What this study shows is that any time the price was below the lower edge of the linear regression range, it turned out to be a good time to buy shares. If you had been holding shares and wanted to take profits, waiting until the price touched or rose above the upper edge of the range marked a good time to do so. After such days, the price either retraced to the mean or reversed its trend altogether.

The lower panel also shows that when the Average True Range (ATR) is on the rise coming into earnings, the price tends to show lackluster performance after the quarterly report. With this in mind it may be useful to review where Apple is today.

Read more:

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Is Apple Flashing a Warning Signal?

The chart below uses the same indicator studies as the previous chart, but shows daily price action on AAPL shares over the last 18 months. The price action almost speaks for itself. With prices well above the Linear Regression study and the price action holding on to a higher level of volatility than before the pandemic crisis, it may be that investors also have high expectations from Apple's quarterly report.

The Bottom Line

U.S. Stock market indexes may reflect nervousness after moving lower in tightly range-bound trading. With Netflix missing earnings estimates, it may be that investors will accelerate their profit taking efforts starting tomorrow. But an even more influential stock, Apple, is showing signs similar to what Netflix showed as earnings approach, namely, high expectations going into earnings.